NiSource Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; unaudited. NiSource is a regulated natural gas and electric utility holding company operating in seven states. Comparisons are with the corresponding 2016 periods unless stated otherwise.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total net revenues | $683.4 million | $643.1 million | $2,443.6 million | $2,245.9 million |
| Operating income | $99.6 million | $113.7 million | $640.6 million | $633.3 million |
| Income from continuing operations | $14.0 million | $23.7 million | $181.0 million | $239.3 million |
| Net income | $14.0 million | $27.2 million | $180.9 million | $242.7 million |
| Basic EPS from continuing operations | $0.04 | $0.07 | $0.55 | $0.74 |
Net revenues increased 6% in Q3 and 9% year to date. Operating margin, calculated as operating income divided by total net revenues, was approximately 14.6% in Q3 2017 versus 17.7% in Q3 2016, and 26.2% year to date versus 28.2%. Q3 operating income fell despite higher net revenues, primarily because operating expenses rose. Nine-month operating income edged higher, but continuing-operations income declined mainly because of a $111.5 million loss on early debt extinguishment.
- Segments: Q3 Gas Distribution reported an operating loss of $23.7 million versus income of $4.3 million; for nine months, income was $362.1 million, down $30.6 million. Q3 Electric Operations income rose to $124.4 million from $112.8 million; nine-month income increased to $286.3 million from $251.5 million.
- Management attributed revenue growth largely to new base rates, infrastructure-replacement programs and electric transmission investment. Warmer weather reduced nine-month gas distribution revenue by $14.6 million; cooler weather reduced electric revenue by $17.3 million.
- Dividends declared were $0.175 per share in Q3 and $0.70 per share year to date, versus $0.165 and $0.64, respectively, in 2016.
Cash flow, debt and liquidity
- Nine-month cash from operating activities was $529.6 million, versus $532.0 million. Capital expenditures were $1,216.4 million, up from $1,083.4 million; investing cash outflow was $1,306.1 million. Financing activities provided $769.4 million.
- Cash and cash equivalents were $19.3 million at September 30, 2017. Net available liquidity, including cash and available borrowing capacity, was $1,275.3 million, compared with $683.7 million at year-end 2016.
- Long-term debt, including the current portion, was $7,808.4 million; short-term borrowings were $843.2 million. Combined borrowings were approximately $8.65 billion, versus approximately $7.91 billion at December 31, 2016. The reported debt-to-capitalization ratio was 66.5%, below the applicable 70% revolving-facility covenant.
- NiSource issued $2.0 billion of senior notes in May and $750 million in September, while retiring or tendering other debt. The debt tender generated the $111.5 million extinguishment loss. The company also raised $314.7 million net through its at-the-market equity program during the nine months, issuing approximately 11.9 million shares.
- NiSource contributed $281.6 million to pension plans during the period, including a discretionary $277 million contribution in Q3, and said it did not anticipate further pension contributions in 2017.
Outlook, regulatory matters and risks
- Management projected 2017 capital expenditures of approximately $1.6–$1.7 billion and described approximately $30 billion in projected long-term regulated utility infrastructure investment. These are investment expectations, not earnings guidance; the filing provides no clear full-year EPS guidance.
- NIPSCO filed a gas base-rate case seeking a $143.5 million annual revenue increase, with an order expected in the second half of 2018. Columbia of Ohio’s proposed five-year infrastructure-replacement program extension remained pending, with an order expected by year-end 2017.
- NIPSCO’s planned generation strategy includes retiring Bailly Units 7 and 8 by May 31, 2018, and indicates retirement of two Schahfer units by the end of 2023. Environmental compliance capital estimates were approximately $193 million for coal ash rules and $170 million for effluent limitations requirements; related approvals and cost recovery were pending. Management estimated that keeping the current coal fleet operating could entail more than $1 billion in operating, maintenance, environmental and other costs over seven years.
- Environmental remediation liabilities totaled approximately $112.6 million. The company identified 64 former manufactured-gas-plant sites with probable liability and estimated $108.0 million of related remediation liability; it said costs could vary by as much as $25 million. Some future environmental costs are not currently estimable, and recovery through rates is not assured.
- Other considerations include weather and customer demand, regulatory decisions and rate recovery, infrastructure construction and operating risks, environmental rules, commodity and interest-rate exposure, pension funding, litigation, and access to capital. Ordinary-course legal proceedings were not individually deemed material, but adverse outcomes could affect results, financial position or liquidity.
- Management said the IBM services agreement termination was under discussion; recorded termination liabilities were not material. Transition to replacement providers was expected to be substantially complete by year-end 2017.
Important facts for investors to verify
- Progress and final outcomes of the NIPSCO gas rate case, Columbia of Ohio infrastructure-plan extension and environmental cost-recovery proceedings.
- Actual 2017 capital spending, financing needs and subsequent debt and ATM share issuance; equity issuance increased the share count.
- Whether operating-cost growth, weather and segment trends affect future margins and earnings.
- Actual environmental compliance and remediation costs, regulatory recovery, and timing or economics of planned generating-unit retirements.
- Pension plan funding and any changes in liquidity, debt metrics or credit ratings.